Wednesday, July 25, 2018

Trade War

I am encouraged by the reported Senate reaction (Politico) to the latest salvo in the trade war, the agriculture department's announcement to ramp up Roosevelt-era farm subsidies to offset the Administration's tariffs.

“Taxpayers are going to be asked to initial checks to farmers in lieu of having a trade policy that actually opens and expands more markets. There isn’t anything about this that anybody should like,” said Sen. John Thune of South Dakota, the No. 3 GOP leader....

You put people in the poorhouse and provide them aid. What you need to do is not put them in the poorhouse,” Corker said

These views are good, but not really in my mind the largest danger. The closest is Sen. Ron Johnson:

“This is becoming more and more like a Soviet type of economy here: Commissars deciding who’s going to be granted waivers, commissars in the administration figuring out how they’re going to sprinkle around benefits,” said Sen. Ron Johnson (R-Wis.). ...”

It's not really Soviet, which was more do what you're told or go to Siberia. It's a darker system, which leads to crony capitalism.

Everyone depends on the whim of the Administration. Who gets tariff protection? On whim. But then you can apply for a waiver. Who gets those, on what basis? Now you can get subsidies. Who gets the subsidies? There is no law, no rule, no basis for any of this. If you think you deserve a waiver, on what basis do you sue to get one?

Well, it sure can't hurt not to be an outspoken critic of the administration when the tariffs, waivers, and subsidies are being handed out on whim.

This is a bipartisan danger. I was critical of the ACA (Obamacare) since so many businesses were asking for and getting waivers. I was critical of the Dodd Frank act since so much regulation and enforcement is discretionary. Keep your mouth shut and support the administration is good advice in both cases. And to my mind, our drift to an economy in which every successful business needs a special waiver or dispensation from the government, granted at the government's pleasure or displeasure, is our greatest danger.

I'm even more delighted to see signs of Congress waking up

... a number of senators have been itching to tie the president’s hands from making unilateral tariff policy with legislation that would require Congress to approve of unilateral tariffs that are imposed with the justification of national security.

Yes, but that's only the beginning. Tariffs are a tax. Why does the President have unilateral power to impose a tax? The president can't change the income tax code (except for some interpretation issues. Index capital gains for inflation now!)

The answer is, because the Congress handed him that power. Congress likes to pass laws that make it look protectionist, and then count on the fact that no sane Administration would ever enforce them.

The regular trade law basically says that the Administration should impose tariffs if any industry is hurt. That's basically any industry that has any imports, i.e. all of them. We have counted for decades on no administration being nutty enough to actually do that.

The national security provisions under which the Trump administration is acting are even vaguer.

By now, both parties ought to be sick of the imperial presidency. Take back the power to impose tariffs. Or at least write a reasonable statute: that tariffs and quotas may only be imposed if consumers are harmed.

If national security is an issue, then write that the defense department must ask for it and pay for it. Do we need steel mills so we can re-fight WWII? If so, put subsidized steel mills on the defense budget. If defense prefers to use the money for a new aircraft carrier rather than a steel mill, well, that's their choice.

We are told that the trade war is all a game on the way to freer trade. I am dubious. From WSJ coverage,

What’s the strategy, what’s the end game here? At what point do we start seeing things move out of the chaotic state they are in now and to where we actually see new trade agreements?” asked Sen. Mike Rounds (R., S.D.).

Mr. Trump, addressing a gathering of veterans groups on Tuesday, urged patience on trade, despite concerns raised by critics: “Just stick with us,” he said. “It’s all working out.”

Well, what is the end game? If it is a world of zero tariffs -- a suggestion the G7 should have taken and run with -- fine, but say so. If it is for China to reform intellectual property treatment, fine, say so. You cannot expect a negotiating adversary to move unless that adversary understands that if you do X, the problem really will be solved. If the goal posts always shift, they have no reason to budge.

I fear the goal is a bilateral trade surplus with every nation. That cannot happen without a massive change in our saving rate and federal deficit. In the meantime, if you impose a lot of tariffs on a country, its exchange rate depreciates so that the overall amount of trade is exactly the same. As is already happening with China, and now currency manipulation charges are back in vogue.*

Wars are hard to win, and they are only won if you have a clear objective, and know to stop when you reach the objective.

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* Update: A blog reader asked for an explanation.

You run a trade deficit with the grocery store. They sell you more food than you sell them. You run a surplus with your employer. You sell him or her more services than they sell you. Bilateral deficits are not a bad thing! If your garden is anything like mine, growing your own is a bad idea.

If you earn more from your employer than you spend at the store, then you are saving money. You run a net trade surplus with the world, and save it. You are accumulating financial assets. If you run a net trade deficit with the world, you are dissaving or borrowing.

So, we have the ironclad law. Savings - Investment = Net Exports. If you want to sell everything to the world, you have to save more than you are investing at home, and use the money you get from selling stuff to the world to buy foreign assets.

If your saving and investment do not change, your export position cannot change.

Now, what happens if the Administration puts a 100% tariff on everything imported, but we do not change savings and investment? Well, the total volume of imports - exports can't change. So the dollar has to go up relative to foreign currencies so that the after tax price of exports has not changed.

I hope that is not too simplified -- Im holding a lot of general equilibrium effects constant. Trade experts feel free to chime in in the comment if I am not clear or screwed that up somehow.

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Update 2: The Washington Examiner does a much better and more detailed job on economic policy by fiat and waiver, though still missing, I think, the greatest danger:

Similarly [as with current tariffs and subsidies], President Barack Obama was able to help companies with taxes and regulations that protected them, with bailouts that rescued them, with a stimulus that subsidized them, and with massive federal programs that padded their profits.

General Electric, Chrysler, Goldman Sachs, Netflix, Boeing, H&R Block, Solyndra, and many other companies benefited, if fleetingly, from Obama’s big-government policies. Conservatives and Republicans generally didn’t applaud these “pro-business” policies even though they created jobs at these favored companies.

Instead, Republicans rightly charged Obama with “picking winners and losers.” ...
GE CEO Jeff Immelt heralded the Obama era with a shareholder letter declaring the “reset” of capitalism. “The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.”

Tax them, regulate them, subsidize them, bail them out.

This was the clear and deliberate structure of Obamanomics. Fewer profits were to be earned separate of government. More profits were to be earned in partnership with government.

That’s where Trumponomics is headed. Trump’s tariffs on China have spurred Chinese tariffs on American soybeans. "No problem," Trump declares, "we’ll just use a New Deal law to subsidized soy bean farmers."
....
Also, forcing business to run the government gauntlet tilts the playing field toward the big guys who can afford the lawyers and lobbyists.

The one thing missing is in that last sentence. It's not just about affording lawyers and lobbyists. It's about showing support for the Administration. Both left and right wing autocracies dispense economic favors in return for political support, or at least acquiescence. People worried about authoritarianism, this is your worry. This is how China and Russia work. And don't mistake this as Trump hysteria. This was my complaint about the Obama administration, and it seems pretty clear that Democrats have no interest in reining in the regulation, waiver, executive order state, they just want to capture it back for themselves.

28 comments:

Agree with the logic, but remain a "glass half full" kinda guy. The premise that trade restrictions will somehow lead to free-er trade does seem silly. But then again, not so long ago, I thought threatening war with North Korea in an effort to find peace with North Korea was foolish. And yet...

The traditional "speak softly and carry a big stick" approach to foreign policy has served the U.S. well. But that is not to say "shout maniacally while brandishing a big stick" cannot work, at least in the short term. And we do seem to be enjoying short term successes along these lines.

"at least write a reasonable statute: that tariffs and quotas may only be imposed if consumers are harmed." Aren't consumers hurt in the first place? If not, Why the subsidies for farmers? Am I missing something in the logic?

The free-trade argument is an easy one to make in the abstract. The real-world question is what does a nation that is committed to free-trade do when their trading partners behave dishonestly, strategically, or duplicitously? Does that nation maintain the status quo? And if it must "punish" trade "aggression" what is the appropriate way to do that?

I read and hear lots of critiques of the current administration's approach. I don't hear any alternatives that have real hope of achieving the objective of freer trade.

"The one thing missing is in that last sentence. It's not just about affording lawyers and lobbyists. It's about showing support for the Administration. Both left and right wing autocracies dispense economic favors in return for political support, or at least acquiescence."

"I fear the goal is a bilateral trade surplus with every nation.That cannot happen without a massive change in our saving rate and federal deficit."

NO. WRONG!!! WHY DO EDUCATED ECONOMISTS KEEP SCREWING THIS UP?

First, you can't run bilateral trade surpluses with any country - one country's deficit is another's surplus. The best you can hope for is a balance of trade - neither country runs a surplus or deficit.

Second, government deficits will have no impact on trade as long as they are internally financed. That was actually one positive impact on quantitative easing, government bond purchases by a central bank eliminate an outlet for foreign savings to be recycled. The only problem with quantitative easing is that central bank independence is eliminated when this avenue is pursued - central bank becomes financing arm of federal government. See the Impossible Trinity

The US can (at least theoretically) have a bilateral trade surplus with every other nation on Earth. What you are saying instead is that it is impossible for every nation on Earth to have a trade surplus - which is true, but I do not think that the American politicians care about trade balances of other nations.

I am not an economist, but if I remember econ 101 correctly, impossible trinity has everything to do with monetary policy and (almost) nothing to do with trade. The US has a floating exchange rate, so it seems to me that it can (but doesn't have to) have an independent monetary policy & free flow of capital. This doesn't mean that the US cannot maintain trade surpluses

Maybe it's just me, but my impression of a "bilateral trade surplus" implies that two countries engaged in trade with each other both are able to simultaneously run trade surpluses with each other - which is a logical impossibility.

You are correct, the impossible Trinity deals with monetary policy, exchange rate, and free flow of capital. I point to it as an example of policy choices that can conflict with each other.

A better "impossibility" that describes this situation is the Humphrey Hawkins Act - see:

https://en.wikipedia.org/wiki/Humphrey–Hawkins_Full_Employment_Act

1. Instructs the government to take reasonable means to balance the budget2. Instructs the government to establish a balance of trade, i.e., to avoid trade surpluses or deficits3. Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth4. Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that minimizes inflation and promotes price stability

Central bank open market operations can reduce trade imbalance (fulfill goal #2) at the expense of goals (#1, #3, and / or #4).

"You run a trade deficit with the grocery store. They sell you more food than you sell them. You run a surplus with your employer. You sell him or her more services than they sell you. Bilateral deficits are not a bad thing! If your garden is anything like mine, growing your own is a bad idea."

ONLY WHEN THE DEPRECIATION RATE FOR THE GOODS BEING TRADED IS SIMILAR.BALANCE SHEETS MATTER!!!

Instead of me trading corn out of my garden for green beans out of yours - consider this - I will trade you 100 bushels of corn out of my garden and loan you the money to buy it at 10% interest over 50 years.

What is the future value of the bushels of corn in one year, five years, twenty years?What is the future value of the loan in one year, five years, twenty years?

John you said "This is a bipartisan danger. I was critical of the ACA (Obamacare) since so many businesses were asking and getting for waivers. I was critical of the Dodd Frank act since so much regulation and enforcement is discretionary. But at least ACA and Dodd Frank were a response to a problem crying out for some sort of remedy - too many Americans without health care coverage, and a financial system that led us into a financial disaster that led to a world wide Great Recession. Here we have government welfare and subsidies to 'fix' a problem created by a U.S. led and instigated international trade war, a war on one of the single most effective actions fostering world economic growth - freer international trade. Trump trade policy is an abomination, with no redeeming qualities.

The road to hell is paved with good intentions. I am not sure there is any meaningful difference between the Obama administration picking and choosing winners and losers and the Trump administration doing so.

The main difference is that the Obama Adminstration tried to do things to help better the country and help people have better lives (granted, it was based on their ideas of what a better life would be), but

The Trump Admin has proven to do things based on what Trump thinks makes him look better and personally benefit from, no matter how horrible it makes people's lives and no matter the harm to the country. Those are facts.

To me the problem with free trade is threefold: (1) concentrated losses and widely distributed benefits, (2) current voter demographics that give those suffering the concentrated losses a disproportionate political influence, and (3) no progress towards changing either (1) or (2) anytime soon.

To me this suggests economists need to spend less time reproving tariffs will hurt the U.S. (obviously!), and more time proving tariffs will hurt, say, Stark County Ohio. Or Luzerne County Pennsylvania. Or any of the many other places in the Upper Midwest who actually decide on the balance of power in Washington.

For all his faults, Trump is no fool. He is keenly aware of where Presidential elections are decided, and governs to those communities. So tariffs aren't going anywhere unless someone can make a case to steel towns in Pennsylvania that steel tariffs are bad for their communities.

Excellent points. On a deeper level, presidentially imposed tariffs are a clear and obvious violation of the United States Constitution. Congress "passed a law" giving the president the "authority to levy taxes(tariffs)". Congress can't legally grant to the president its own constitutionally granted powers to levy taxes and duties (Article 1 Section 8) without a constitutional amendment. That "law congress passed" is unconstitutional and should be struck down. However, now our legislative geniuses are talking about "restricting the tariff making power of the president", a power that is already demonstrably illegal.

If Congress could "pass a law" that changes the constitutionally granted powers of the presidency, judiciary or Congress without the requirement of a constitutional amendment, it could legislate away the entire structure of the US government with a simple majority if the president went along.

Trump is using the trade expansion act of 1962, at least for steel, which requires no congressional approval to levy a tariff, and is therefore an unconstitutional law. Yes, the Reciprocal Tariff Act, which you cited, only gave the president the authority to negotiate tariffs that Congress then had to approve, and kept the Congress and the president within their constitutionally defined roles. Not so lately.

There is also another more specific constitutional provision that requires any bill to raise revenue for the federal government to originate in the House of Representatives, known as the Origination Clause. Tariffs assuredly raise revenue for the government and were the main source of revenue for a long time.

All of the above is certainly more legal than economic, but the argument for more liberalized trade relations certainly should consider both factors.

It is also of probably more than incidental interest that the reigning interpretation of law Chief Justice John Marshall made in the famous Marbury vs. Madison case was that Congress can't pass a law that gives powers to the president that the constitution doesn't grant to the president - such laws are unconstitutional. But this is exactly what has happened with the Trade Expansion Act of 1962, an unconstitutional law. You would think the injured in this war would take this issue to court.

Thanks for the info. For the current thinking on the Origination Clause see:

https://fas.org/sgp/crs/misc/RL31399.pdf

"The Supreme Court has occasionally ruled on Origination Clause matters, adopting a definition of revenue bills that is based on two central principles that tend to narrow its application to fewer classes of legislation than the House:"

(1) Raising money must be the primary purpose of the measure, rather than an incidental effect

(2) The resulting funds must be for the expenses or obligations of the government generally, rather than a single, specific purpose.

That seems like a pretty easy hurdle to clear. I, as President, am assessing a tariff on such and such country because such and such leader looked at me crossways at the last G7 meeting.

"You would think the injured in this war would take this issue to court."

Do manufacturers in foreign countries that attempt to sell goods in U. S. markets have standing to sue in U. S. Federal Court?

Can US buyers of goods produced overseas seek remedy in the form of a class action suit?

Thanks for the info as well. I'm enjoying the exchange. You just pointed out why an editorial in the New York Times by a law professor last year regarding the Origination Clause and its relation to presidential tariffs is incorrect.

Regarding standing, a U.S. based nail manufacturer who has been shedding employees and profits because of the increased costs of steel imported from Canada or other countries due to the new steel tariff (this has happened) assuredly has standing in federal court.

As far as the other entities you mentioned, their standing is not clear to me, though I will look into it further.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!